Both large and small businesses often have one or two individuals that are responsible for a huge portion of the company’s revenue, like the CEO, owner or a key employee. Unexpectedly losing someone central to company viability could irrevocably harm the business or even force it into bankruptcy. Key man (or key person) insurance mitigates against this possibility and protects the business if they experience key person loss.
What is key man insurance? In brief, key man insurance is a life or disability insurance policy taken out by a company on an indispensable person to protect it from the losses incurred as a result of the key person’s inability to work.
How Does Key Man Insurance Work?
The typical aim of key man insurance policy is to prevent a business from going under in the event of an integral team member’s extended absence due to death or disability. The company itself pays for the insurance policy and acts as beneficiary. So if a key person dies or is incapacitated for a long period of time, the company receives compensation based on their policy. Businesses can use those funds for a variety of functions such as:
- paying off debts,
- covering overhead costs,
- redistributing money,
- recruiting, hiring, and training replacements,
- paying severance,
- or closing the business.
The typical aim of key man insurance policy is to prevent a business from going under in the event of an integral team member’s extended absence due to death or disability.
Who Can be a Key Person?
The other half of the first step is the insurance acquisition. There are 2 basic ways that insurance is sIn theory, anyone can be a key person — so long as they contribute to the viability of the business in a significant way. Most of the time the business owner, CEO or founder is the key person of the business. Sometimes companies may designate an important employee as a key person as well. It is possible to take out more than one key man policy at a company. Larger companies may opt to follow this practice.
Key Man Insurance Payouts
There are four types of insurable losses covered by key man insurance policies.
- Losses related to the extended period in which the key person is not able to work. This can also include the hiring of temporary personnel, and/or costs associated with the recruitment and training of a replacement.
- Losses related to profits generated by the key person such as lost revenue from sales or losses in revenue from time-sensitive projects. This may also encompass lost revenue from a business’s inability to grow or expand as previously planned.
- Protection to shareholders or partnership interests. This allows existing shareholders or partners to purchase shareholdings or partnerships in the event of a key person’s death.
- Insurance for the guaranteed value of a bank loan.
How Much Does Key Man Insurance Cost?
As established above, key man insurance can save a small business from going under due to the loss of an integral team member. It can also offset the substantial losses a larger business may experience should an integral employee or executive become unable to work. But how much does it cost? The answer you might get elsewhere is that “it depends.” To be fair, it does. However, you can get a more accurate estimate for how much you can expect to pay for key man insurance by starting with our free insurance calculator. Just fill out the form to get the information you need.
At Blue Herring, we have years of specific experience in business continuity planning and executive compensation. We’re experts in key man insurance policies, and we operate differently from other firms in our field — no one else offers a free key man insurance calculator. Plus, because we’re fully independent, we’re able to ensure you get the best quote possible for your particular needs. Contact us here for more information or to get a quote.